Does the U.S. Realize It's in Competition?

Globalization these days is not just about inexpensive manufacturing.
It includes virtually all aspects of industry, and the really smart
companies are taking each component of their businesses and
executing it in that part of the world that has competitive talent
at competitive wage rates.

Historically, what has been the core competency of the U.S. that
has driven its success? It's innovation. We invented the automobile
industry, the steel industry, chemicals, materials, pharmaceuticals,
information technology and most recently, the biotechnology industry.
When these major innovations occur, product development and
manufacturing typically take place in the United States for a period
of time. As the industry becomes more mature, globalization takes
over and various tasks move out to various parts of the world that
can perform them most effectively and efficiently. This cycle has
happened over and over again.

Hence, the most important task of the United States is to protect
and strengthen its ability to innovate. That is what has driven our
economy in the past and will likely drive it in the future.
Unfortunately, U.S. innovation now faces three major risks,
as other countries become more competitive.

First, we face a talent disadvantage. Recently, when I was the
chair of the education committee of the President's Council
of Advisors on Science and Technology, I learned that more than
80 percent of emerging technical talent is being developed in Asia.
In fact, China and India have more honor students than we have
students. Most importantly, our K-12 public education system
has been broken for two decades, and the primary issue is weak
teachers. Fifty-six percent of public high school physical science
students are taught by "out of field" teachers, who never even
minored in science. Chances are slim a student can be enticed into
a science or engineering career by such a teacher. Teachers should
be given performance appraisals, and each year the weakest
should be terminated, but that concept is banned by the teachers
unions, and politicians won't deal with it. Today K-12 public
education in America is drowning in mediocrity because of the
protection of weak teachers, which drives out strong teachers.

The second risk relates to driving multinational corporations out
of America. Today in Washington, D.C., there is little understanding
of how multinational corporations work. For example, even though
the United States has the second highest corporate tax rate in the
world (35 percent), the U.S. government is considering taxing a
multinational company's foreign profits even when they don't bring
those profits back to the U.S. More than 20 multinational companies
have already decided to reincorporate outside of the U.S., to
countries such as Switzerland, Ireland and Singapore, just in case
that threat becomes law. Examples are Accenture and Tyco.

I am on the audit committee of the board of directors of a major
U.S.-based multinational, and we are evaluating a move to
Switzerland or Singapore. As a board member, I am legally bound
to be aggressive on tax issues for shareholders. Reincorporating
outside the U.S. causes major losses in jobs and the risk of moving
innovation to other countries. The U.S. government needs to
overhaul corporate taxes and get competitive.

The third area where the U.S. is falling behind is research and
development. In the 1970s, 6 percent of the U.S. government
budget funded R&D. Now it's 1.7 percent. Additionally, other
countries are recruiting our top R&D talent. Governments of
Singapore, China and others are very aggressive at recruiting our
top technical talent. For example, China has opened up the world's
largest nanotechnology center and is going around the world luring
world-class nanotechnology experts by offering 10-year, $100
million grants. When two prize scientists at the U.S. National
Institute of Health were recruited away to the Genome Institutes
of Singapore, they commented, "We wanted to be in a place where
they are excited by science." We need to take tens of billions from
the ineffective Department of Education, which has a budget of
$63 billion in discretionary funds, and fund key technologies.

It is very clear that the U.S. is getting beat by some very
aggressive competitors. Unfortunately, our government officials
do not even seem to realize that we are in competition.

Robert J. Herbold (GRS '66, Mathmatics; '68, Computer Science)
is a former executive vice president and chief operating officer of Microsoft Corp.
Prior to his role at Mircosoft, Herbold spent 26 years at Procter & Gamble, including
the last five as senior vice president of marketing. He is currently an operating partner
of the private equity firm Thoma Bravo LLC and the managing director of The Herbold Group LLC,
a consulting business focused on profitability.